What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2024-04-18 compared with 2023-04-13 · 114 added, 126 removed, 349 unchanged (41% of the section changed)

2 unchanged sentences

Index to Consolidated Financial Statements

Reports of Independent Registered Public Accounting Firms (Deloitte & Touche LLP - PCAOB ID:

34 ) (KPMG LLP - PCAOB ID:

Report of Independent Registered Public Accounting Firm (Deloitte & Touche LLP - PCAOB ID:

Consolidated Balance Sheets

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We have audited the accompanying consolidated balance sheets of Citi Trends, Inc.

and subsidiary (the "Company") as of January 28, 2023 and January 29, 2022, the related consolidated statements of operations, cash flows, and stockholders’ equity, for each of the two years in the period ended January 28, 2023, and the related notes (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of January 28, 2023 and January 29, 2022, and the results of its operations and its cash flows for each of the two years in the period ended January 28, 2023, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of January 28, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 13, 2023, expressed an unqualified opinion on the Company's internal control over financial reporting.

and subsidiary (the "Company") as of February 3, 2024 and January 28, 2023, the related consolidated statements of operations, cash flows, and stockholders ’ equity, for each of the three years in the period ended February 3, 2024, and the related notes (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of February 3, 2024 and January 28, 2023, and the results of its operations and its cash flows for each of the three years in the period ended February 3, 2024, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of February 3, 2024, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 18, 2024, expressed an unqualified opinion on the Company's internal control over financial reporting.

Basis for Opinion

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The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Inventory – Retail Inventory Method – Refer to Note 2 to the financial statements

Inventory – Retail Inventory Method – Refer to Note 2 to the consolidated financial statements

Critical Audit Matter Description

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Under the retail inventory method, the cost of inventory is determined by calculating a cost-to-retail ratio and applying it to the retail value of inventory.

Inherent in the retail inventory calculation are certain management judgments and estimates, including, among others, merchandise markdowns and shrinkage, which impact the ending inventory valuation at cost as well as resulting cost of sales.

Inherent in the retail inventory calculation are certain management judgments and estimates, including, among others, merchandise markdowns, which impact the ending inventory valuation at cost as well as resulting cost of sales.

Merchandise markdowns are reflected in the inventory valuation when the price of an item is lowered in the stores.

The Company estimates and records an allowance for shrinkage for the period between the last physical count and the balance sheet date.

The estimate of shrinkage can be affected by changes in actual shrinkage trends.

The balance of ending inventory was $105.8 million as of January 28, 2023.

Given the valuation of inventory under the retail inventory method requires management to make significant judgments and estimates, performing audit procedures to evaluate the reasonableness of the judgments and estimates related to the timing of

markdowns and the allowance for shrinkage used in the valuation of inventory required a high degree of auditor judgment and an increased extent of effort.

Given the valuation of inventory under the retail inventory method requires management to make judgments and estimates, performing audit procedures to evaluate the reasonableness of the judgments and estimates related to the timing of markdowns used in the valuation of inventory required an elevated degree of auditor judgment.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures to evaluate the reasonableness of the judgments and estimates related to the timing of markdowns and the allowance for shrinkage used in the valuation of inventory included the following, among others:

● We tested the effectiveness of controls over the measurement of inventory under the retail inventory method, including merchandise markdowns and allowance for shrinkage.

Our audit procedures to evaluate the reasonableness of the judgments and estimates related to the timing of markdowns used in the valuation of inventory included the following, among others:

● We tested the effectiveness of controls over the measurement of inventory under the retail inventory method, including merchandise markdowns.

● We tested the timing of markdowns by:

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and, if marked down, that the markdown was recorded timely.

● We evaluated the assumptions used by management to estimate the allowance for shrinkage by:

o Attending a selection of store physical inventories and recalculating the shrinkage for locations using the results of the store physical inventory.

o Comparing management’s prior-year assumptions of expected shrinkage activity to actual activity incurred during the current year to determine the appropriateness of the allowance for shrinkage.

o Developing an expectation of shrinkage in ending inventory based on historical relationships between shrinkage and inventory balances on hand and compared to recorded shrinkage.

o Comparing the Company’s historical and current year inventory shrinkage to industry reports.

/s/ Deloitte & Touche LLP

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We have served as the Company's auditor since 2021.

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

Citi Trends, Inc.

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated statements of operations, stockholders’ equity and cash flows of Citi Trends, Inc.

and subsidiary (the Company) for the year ended January 30, 2021, and the related notes (collectively, the consolidated financial statements).

In our opinion, the consolidated financial statements present fairly, in all material respects, the results of operations of the Company and its cash flows for the year ended January 30, 2021, in conformity with U.S.

generally accepted accounting principles.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ( PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audit provides a reasonable basis for our opinion.

We served as the Company’s auditor from 2002 to 2021.

Jacksonville, Florida

April 14, 2021

Citi Trends, Inc.

Consolidated Balance Sheets

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Total current assets

Property and equipment, net of accumulated depreciation

Property and equipment

Operating lease right of use assets

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Authorized 32,000,000 shares;

16,158,494 shares issued as of January 28, 2023 and 16,090,365 shares issued as of January 29, 2022;

8,354,481 shares outstanding as of January 28, 2023 and 8,617,210 shares outstanding as of January 29, 2022

16,354,714 shares issued as of February 3, 2024 and 16,158,494 shares issued as of January 28, 2023;

8,550,701 shares outstanding as of February 3, 2024 and 8,354,481 shares outstanding as of January 28, 2023

Paid in capital

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Treasury stock, at cost;

7,804,013 shares held as of January 28, 2023 and 7,473,155 shares held as of January 29, 2022

7,804,013 shares held as of February 3, 2024 and January 28, 2023

Total stockholders ’ equity

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Gain on sale-leasebacks

Income from operations

(Loss) income from operations

Interest income

Interest expense

Income before income taxes

Income tax expense

Basic net income per common share

Diluted net income per common share

(Loss) income before income taxes

Income tax benefit (expense)

Net (loss) income

Basic net (loss) income per common share

Diluted net (loss) income per common share

Weighted average number of shares outstanding

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Operating activities:

Net (loss) income

Adjustments to reconcile net income to net cash provided by operating activities:

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Non-cash stock-based compensation expense

Gain on sale-leasebacks

Gain on sale of assets or insurance related activities

Changes in assets and liabilities:

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Layaway deposits

Net cash provided by operating activities

Net cash (used in) provided by operating activities

Investing activities:

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Proceeds from sale-leasebacks

Net cash provided by (used in) investing activities

Net cash (used in) provided by investing activities

Financing activities:

Borrowings under revolving credit facility

Repayments of revolving credit facility

Payment of debt issuance costs

Cash used to settle withholding taxes on the vesting of nonvested restricted stock

Dividends paid to stockholders

Cash used to settle withholding taxes on vested restricted stock

Repurchase of common stock

Net cash used in financing activities

Net increase (decrease) in cash and cash equivalents

Net (decrease) increase in cash and cash equivalents

Cash and cash equivalents:

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Treasury Stock

Balances — February 1, 2020

Balances — January 30, 2021

Vesting of nonvested shares

Conversion of nonvested cash-settled units to nonvested shares

Issuance of nonvested shares

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Repurchase of common stock

Dividends paid to stockholders ( $ 0.08 per common share)

Balances — January 29, 2022

Vesting of nonvested units

Conversion of nonvested cash-settled units to nonvested shares

Vesting of nonvested shares

Issuance of nonvested shares

Issuance of common stock under incentive plan, net of shares withheld for taxes

Forfeiture of nonvested shares

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Balances — January 28, 2023

Vesting of nonvested units

Issuance of nonvested shares

Issuance of common stock under incentive plan, net of shares withheld for taxes

Forfeiture of nonvested shares

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Net share settlement of nonvested shares

Repurchase of common stock

Balances — January 28, 2023

Balances — February 3, 2024

See accompanying notes to consolidated financial statements.

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and its subsidiary (the “ Company ” ) is a leading specialty value retailer of apparel, accessories and home trends for way less spend primarily for African American and multicultural families in the United States.

As of January 28, 2023, the Company operated 611 stores in urban, suburban and rural markets in 33 states.

The COVID-19 pandemic and related government stimulus caused significant volatility and disruptions in our business during fiscal 2020 and 2021.

Certain lingering economic effects of the pandemic, such as supply chain disruptions, continued to impact results in fiscal 2022.

T he Company cannot reasonably predict the extent to which our future business will be impacted by the pandemic.

As of February 3, 2024, the Company operated 602 stores in urban, suburban and rural markets in 33 states.

Summary of Significant Accounting Policies

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The Company ’ s fiscal year ends on the Saturday closest to January 31 of each year.

The years ended January 28, 2023, January 29, 2022 and January 30, 2021 are referred to as fiscal 2022, fiscal 2021 and fiscal 2020, respectively, in the accompanying consolidated financial statements.

Fiscal 2022, 2021 and 2020 are all comprised of 52 weeks.

The years ended February 3, 2024, January 28, 2023 and January 29, 2022 are referred to as fiscal 2023, fiscal 2022 and fiscal 2021, respectively, in the accompanying consolidated financial statements.

Fiscal 2023 has a 53 -week accounting period, and fiscal years 2022 and 2021 are each comprised of 52 weeks.

Use of Estimates

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Inventory is recorded net of an allowance for shrinkage based on the most recent physical inventory counts and other assumptions for shrinkage activity.

The allowance for inventory shrinkage was $ 5.8 million as of January 28, 2023 and $ 4.4 million as of January 29, 2022.

The allowance for inventory shrinkage was $ 3.9 million as of February 3, 2024 and $ 5.8 million as of January 28, 2023.

Property and Equipment, net

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If facts and circumstances indicate that a long-lived asset may be impaired, the carrying value is reviewed.

If this review indicates that the carrying value of the asset will not be recovered as determined based on projected undiscounted cash flows related to the asset over its remaining life, the carrying value of the asset is reduced to its estimated fair value.

There was no impairment expense in fiscal 2022 or 2021 and non-cash impairment expense of $ 0.3 million in fiscal 2020 related primarily to leasehold improvements and fixtures and equipment at underperforming stores.

If this review indicates that the carrying value of the asset group will not be recovered as determined based on projected undiscounted cash flows related to the asset over its remaining life, the carrying value of the asset is reduced to its estimated fair value.

There was non-cash impairment expense in fiscal 2023 of $ 1.0 million consisting of $ 0.9 million for leasehold improvements and fixtures and equipment at underperforming stores, and $ 0.1 for a right of use asset.

There was no impairment expense in 2022 or 2021.

Insurance Liabilities

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Expected refunds to customers are recorded based on estimated margin using historical return information.

The refund liability for merchandise returns is recorded in accrued expenses on the consolidated balance sheet and totaled $ 0.3 million and $ 0.2 million as of January 28, 2023 and January 29, 2022.

The corresponding asset for the recoverable cost of expected refunds is included in prepaid and other current assets and totaled $ 0.1 million as of both January 28, 2023 and January 29, 2022.

The refund liability for merchandise returns is recorded in accrued expenses on the consolidated balance sheet and totaled $ 0.2 million and $ 0.3 million as of February 3, 2024 and January 28, 2023, respectively.

The corresponding asset for the recoverable cost of expected refunds is included in prepaid and other current assets and totaled $ 0.1 million as of both February 3, 2024 and January 28, 2023.

Disaggregation of Revenue

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Cost of Sales

Cost of sales includes the cost of inventory sold during the period and transportation costs, including inbound freight related to inventory sold and freight from the distribution centers to the stores, net of discounts and allowances.

Cost of sales includes the cost of inventory sold during the period and transportation costs, including inbound freight related to inventory sold, freight from the distribution centers to the stores and freight from vendors to stores, net of discounts and allowances.

Distribution center costs, store occupancy expenses and advertising expenses are not considered components of cost of sales and are included as part of selling, general and administrative expenses.

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Operating Leases

The Company leases all of its retail store locations and certain office space and equipment.

The Company leases all of its retail store locations, its distribution centers and certain office space and equipment.

All leases are classified as operating leases.

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Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are

expected to be recovered or settled.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.

If there is a change in tax rates, the Company would recognize the impact of such change in income in the period that includes the enactment date.

Business Operating Segment

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All sales and assets are located within the United States.

New Accounting Pronouncement

In December 2023, the FASB issued ASU 2023-09, “ Improvement to Income Tax Disclosures (Topic 740) ” , which requires additional disclosures for income tax rate reconciliations, income taxes paid, and certain other tax disclosures.

ASU 2023-09 is intended to enhance the transparency and decision usefulness of income tax disclosures.

The amendments in ASU 2023-09 address investor requests for enhanced income tax information primarily through changes to the rate reconciliation and income taxes paid information.

Adoption is required for annual periods beginning after December 15, 2024.

The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.

Property and Equipment, net

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The facility was further amended on April 15, 2021 to modify terms and extend the maturity date to April 15, 2026.

In May 2023, the facility was amended to replace the London Interbank Offered Rate ( “ LIBOR ” ) with the Secured Overnight Financing Rate ( “ SOFR ” ).

The amended facility provides a $ 75 million credit commitment and a $ 25 million uncommitted “ accordion ” feature that under certain circumstances could allow the Company to increase the size of the facility to $ 100 million.

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The facility has an unused commitment fee of 0.20 % and permits the payment of cash dividends subject to certain limitations.

Borrowings under the credit facility bear interest (a) for Eurodollar Loans, at a rate equal to the Eurodollar Rate plus either 1.25 % , 1.50 % or 1.75 % , or (b) for Base Rate Loans, at a rate equal to the highest of (i) the prime rate, (ii) the Federal Funds Rate plus 0.5 % or (iii) the Eurodollar Rate plus 1.0 % , plus, in each case either 0.25 % , 0.50 % or 0.75 % , based in any such case on the average daily availability for borrowings under the facility.

On March 20, 2020, in response to the COVID-19 pandemic, the Company borrowed $ 43.7 million on the credit facility to enhance its liquidity position.

On September 11, 2020, the Company repaid the full amount outstanding under the credit facility.

Such borrowings accrued interest ranging from 1.625 % to 3.5 % .

As of January 28, 2023, the Company had no borrowings under the credit facility and $ 0.6 million of letters of credit outstanding.

Income tax expense consists of the following (in thousands):

Borrowings under the credit facility bear interest (a) for SOFR Loans, at a rate equal to the SOFR Rate plus a SOFR adjustment equal to 0.10 % plus either 1.25 % , 1.50 % or 1.75 % , or (b) for Base Rate Loans, at a rate equal to the highest of (i) the prime rate, (ii) the Federal Funds Rate plus 0.5 % or (iii) the Eurodollar Rate plus 1.0 % , plus, in each case either 0.25 % , 0.50 % or 0.75 % , based in any such case on the average daily availability for borrowings under the facility.

As of February 3, 2024, the Company had no borrowings under the credit facility and $ 1.4 million of letters of credit outstanding.

Income tax benefit (expense) consists of the following (in thousands):

Total current

Total deferred

Total income tax expense

Income tax expense computed using the federal statutory rate is reconciled to the reported income tax expense as follows (in thousands):

Total income tax benefit (expense)

Income tax benefit (expense) computed using the federal statutory rate is reconciled to the reported income tax benefit (expense) as follows (in thousands):

Statutory rate applied to income before income taxes

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Excess (deficit) tax benefits from stock-based compensation

Income tax expense

Income tax benefit (expense)

Deferred tax assets and deferred tax liabilities consist of the following (in thousands):

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Research and development

Net operating loss and charitable contribution carryforwards

Subtotal deferred tax assets

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The Company reviews and assesses uncertain tax positions, if any, with recognition and measurement of tax benefit based on a “ more-likely-than-not ” standard with respect to the ultimate outcome, regardless of whether this assessment is favorable or unfavorable.

As of January 28, 2023, there were no material benefits taken on the Company’s income tax returns that do not qualify for financial statement recognition.

As of February 3, 2024, there were no material benefits taken on the Company ’ s income tax returns that do not qualify for financial statement recognition.

If a tax position does not meet the minimum statutory threshold to avoid payment of penalties and interest, a company is required to recognize an expense for the amount of the interest and penalty in the period in which the company claims or expects to claim the position on its tax return.

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Should such expense be incurred in the future, the Company will classify such interest as a component of interest expense and penalties as a component of income tax expense.

At February 3, 2024, the Company had income tax net operating loss ( “ NOL ” ) carryforwards for federal purposes of $ 9.5 million (gross) and for state purposes of $ 0.4 million (tax effected).

The federal tax NOL carryforwards have an indefinite carryforward, but are limited to offsetting 80 % of taxable income in future years.

The majority of state tax NOL carryforwards either follow federal indefinite carryforward or begin to expire in 2038, with one jurisdiction expiring in 2028.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.

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Subsequent to 2011, the Company has continued to earn such state credits and has further adjusted the related valuation allowance.

At January 28, 2023, the valuation allowance, net of federal tax benefit, totaled $ 1.2 million.

At February 3, 2024, the valuation allowance, net of federal tax benefit, totaled $ 1.9 million.

The effective income tax rate for fiscal 2023, 2022 and 2021 included the recognition of benefits arising from various federal and state tax credits.

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Total investment

At January 28, 2023, $ 50.0 million remained available under the Company’s previously announced stock repurchase authorization.

At February 3, 2024, $ 50.0 million remained available under the Company ’ s previously announced stock repurchase authorization.

Stock-Based Compensation

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The Plan provides for the grant of incentive and nonqualified options, stock appreciation rights, restricted stock, restricted stock units, performance awards and other forms of stock-based and cash-based compensation.

At January 28, 2023, the Company had 610,968 shares reserved for future grants under the Plan.

At February 3, 2024, the Company had 361,841 shares reserved for future grants under the Plan.

During fiscal 2023, 2022 and 2021, non-cash stock-based compensation expense recorded in selling and general and administrative expenses totaled $ 4.1 million, $ 3.6 million and $ 4.8 million, respectively.

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Outstanding as of January 28, 2023

At January 28, 2023, there was $ 5.7 million of unrecognized compensation expense related to restricted stock.

Based on current probable performance, there was no unrecognized compensation expense related to PSUs .

Outstanding as of February 3, 2024

At February 3, 2024, there was $ 4.1 million of unrecognized compensation expense related to restricted stock.

Based on current probable performance, we have determined no compensation expense is required on our PSUs.

Stockholder Right Agreement

On December 6, 2023, the board of directors adopted a limited duration stockholder protection rights plan, pursuant to which the board declared a dividend of one preferred share purchase right (a “ Right ” ) for each of the Company ’ s issued and outstanding shares of common stock, par value $ 0.01 per share.

The dividend was paid to the stockholders of record at the close of business on December 18, 2023.

Each Right entitles the registered holder, subject to the terms of the Rights Agreement (as defined below), to purchase from the Company one ten-thousandth of a share of the Company ’ s Series A Junior Participating Preferred Stock, par value $ 0.01 per share, at a price of $ 120.00 , subject to certain adjustments.

The Rights are governed by the Stockholder Protection Rights Agreement, dated as of December 6, 2023 (the “ Rights Agreement ” ), by and between the Company and Equiniti Trust Company, LLC, and are exercisable only after the occurrence of certain conditions set forth in the Rights Agreement.

The Rights Agreement expires upon the close of business on December 4, 2024, but may expire earlier upon the occurrence of certain events set forth in the Rights Agreement .

Commitments and Contingencies

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Once it becomes probable that the Company will incur costs in connection with a legal proceeding and such costs can be reasonably estimated, it establishes appropriate reserves.

While legal proceedings are subject to uncertainties and the outcome of any such matter is not predictable, the Company is not aware of any legal proceedings pending or threatened against it that it expects to have a material adverse effect on its financial condition, results of operations or liquidity.

In January 2023, the Company experienced a disruption of our back office and distribution center IT systems, which was due to what is known as Hive ransomware.

In connection with this incident, third party consultants and forensic experts were engaged to assist with the restoration and remediation of the Company’s systems and, with the assistance of law enforcement, to investigate the incident.

The Company can confirm that sensitive customer data is not retained on its systems.

The impact of this disruption was not material to the Company’s fourth quarter fiscal 2022 financial results and, while the Company’s investigation and remediation efforts remain ongoing, it is not expected to be material to the Company’s full year fiscal 2023 financial results.

In fiscal 2022, cyber disruption related costs incurred totaled $ 0.1 million, primarily comprised of third-party consulting services and legal counsel.

The Company has cyber insurance and is working diligently with its insurance carriers on claims to recover costs incurred.

The Company anticipates that its financial costs related to the cyber disruption will ultimately be covered by insurance, subject to a retention.

The Company expects to incur ongoing costs related to the cyber disruption, including costs to enhance data security, and plans to take further steps to prevent unauthorized access to, or manipulation of, its systems and data.

The Company is unable to estimate the ultimate direct and indirect financial impacts of this cyber disruption.

The Company leases its retail store locations and certain office space and equipment.

In connection with the previously disclosed January 2023 cyber disruption, four putative class action lawsuits were filed against the Company in the United States District Court for the Southern District of Georgia (the “ Court ” ).

These matters, Matousek et al v.

Citi Trends, Inc.;

Sienna Thomas v.

Citi Trends, Inc.;

Yeimy Sambrano v.

Citi Trends, Inc.;

Sabrina Green-Fogg v.

Citi Trends, Inc.

were filed in the second half of 2023, and consolidated into one case by the Court on November 8, 2023.

The plaintiffs allege harm in connection with the January 2023 cyber disruption and assert a variety of claims seeking unspecified monetary damages and other related relief.

A consolidated class action complaint was filed on February 15, 2024, adding an additional plaintiff, Shykira Scott.

The Company is vigorously defending these lawsuits and filed a motion to dismiss the consolidated class action complaint, as well as a motion to compel individual arbitration and dismiss or stay actions on March 22, 2024.

In addition, the Attorneys General of Alabama, Connecticut, Indiana and Texas sent inquiry letters to the Company regarding the January 2023 cyber disruption, which the Company has answered.

As of the end of fiscal 2023, the Company had an accrual of $ 0.8 million for estimated losses in connection with these matters recorded in Accrued expenses.

The ultimate loss to the Company for these matters could be materially different from the amount the Company has accrued.

The Company cannot predict or estimate the duration or ultimate outcome of these matters.

The Company is unable to predict whether it may be subject to other lawsuits, claims or inquiries.

While legal proceedings are subject to uncertainties and the outcome of any such matter is not predictable and it is possible that we could incur losses associated with these proceedings, the Company does not believe, based on the information available to it at the time of this filing, that any legal proceedings pending or threatened against it will have a material adverse effect on its financial condition, results of operations or liquidity.

The Company is also party to purchase obligations for open merchandise orders of $ 132.8 million that is due within 12 months.

The Company leases its retail store locations, its distribution centers and certain office space and equipment.

Leases for store locations are typically for a term of five years with options to extend for one or more five-year periods.

In fiscal 2022, the Company completed sale-leasebacks of its distribution centers.

The Darlington, South Carolina distribution center lease has a 20-year lease term with the option to extend for six additional periods of five years each.

The Roland, Oklahoma distribution center has a 15-year lease term with the option to extend for six additional periods of five years each.

The sale-leaseback transactions resulted in a gain of approximately $ 64.1 million in the Statement of Operations for the year ended January 28, 2023.

The Company analyzes all leases at inception to determine if a right-of-use asset and lease liability should be recognized.

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The lease liability is measured at the present value of future lease payments as of the lease commencement date.

In April 2022, the Company completed a sale-leaseback of its distribution center in Darlington, South Carolina for net proceeds of approximately $ 45.5 million.

The total annual rent for this property starts at approximately $ 3.2 million with increases of 2 % annually over the 20-year lease term.

The net proceeds included $ 5.6 million of advance funding for a capital improvement project that will be amortized over the 20-year lease term.

The lease contains the option to extend for six additional periods of five years each.

The transaction met the requirements for sale-leaseback accounting, resulting in a gain of approximately $ 34.9 million on the condensed consolidated statements of operations.

The related land and property were removed from property and equipment, and an operating lease right-of-use asset and lease liability of $ 42.6 million and $ 37.0 million, respectively, were recorded in the condensed consolidated balance sheets.

In September 2022, the Company completed a sale-leaseback of its distribution center in Roland, Oklahoma for net proceeds of approximately $ 35.6 million.

The total annual rent for this property starts at approximately $ 2.7 million with increases of 2 % annually over the 15-year lease term.

The net proceeds included $ 0.6 million of advance funding for a capital improvement project that will be amortized over the 15-year lease term.

The lease contains the option to extend for six additional periods of five years each.

The transaction met the requirements for sale-leaseback accounting, resulting in a gain of approximately $ 29.2 million on the condensed consolidated statements of operations.

The related land and property were removed from property and equipment, and an operating lease right-of-use asset and lease liability of $ 25.8 million each were recorded in the condensed consolidated balance sheets.

Total lease cost is comprised of operating lease costs, short-term lease costs and variable lease costs, which include rent paid as a percentage of sales, common area maintenance, real estate taxes and insurance for the Company ’ s real estate leases.

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Total lease cost

In response to the impact of the COVID-19 pandemic on the Company’s operations in fiscal 2020, the Company suspended certain lease payments under its existing lease agreements.

During the suspension of payments, the Company continued to recognize expenses and liabilities for lease obligations and corresponding right-of-use assets on the balance sheet in accordance with the applicable accounting guidance.

The Company negotiated contractual rent concessions on certain leases in the form of early renewals, rent deferrals and rent abatements.

The Company elected to account for qualifying COVID-19 related rent concessions as if they were part of the enforceable rights and obligations under the existing lease agreements, as permitted by the updated guidance provided by the FASB in April 2020.

As a result of this election, the Company recognized rent abatement credits of approximately $ 0.3 million and $ 0.7 million in fiscal 2022 and 2021, respectively.

The balance of accrued lease liabilities related to these suspended payments was $ 0.2 million at January 28, 2023.

Future minimum lease payments as of January 28, 2023 are as follows (in thousands):

Future minimum lease payments as of February 3, 2024 are as follows (in thousands):

Total future minimum lease payments

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Weighted average discount rate - operating leases

Subsequent Event

As previously disclosed in the Company ’ s Form 8-K filed on February 29, 2024, the Company entered into a Cooperation Agreement (the “ Cooperation Agreement ” ) with Fund 1 Investments, LLC, a Delaware limited liability company (the “ Investor ” ) on February 28, 2024.

Pursuant to the Cooperation Agreement, the Company (i) appointed certain individuals as an observer to the Company ’ s Board of Directors to serve as such until the conclusion of the 2024 annual meeting of stockholders (ii) agreed to nominate each of the individuals for election to the Board at the 2024 Annual Meeting;

and (iii) accepted the retirement, effective as of the conclusion of the 2024 Annual Meeting, of three incumbent directors.

The Cooperation Agreement also gives the Investor, contingent upon the Investor satisfying certain conditions, replacement rights with respect to those new directors.

In addition, the Investor agreed to vote all Voting Securities (as defined in the Cooperation Agreement) beneficially owned by it or its affiliates at the 2024 Annual Meeting in accordance with the Board ’ s recommendations with respect to any and all proposals, with limited and specified exceptions.

The Investor also agreed to certain customary standstill provisions prohibiting it from, among other things, (i) soliciting proxies;

(ii) advising or knowingly encouraging any person with respect to the voting or disposition of any securities of the Company, subject to limited exceptions;

(iii) making public announcements regarding certain transactions involving the Company;

and (iv) taking actions to change or influence the Board, management or the direction of certain Company matters;

in each case as further described in the Cooperation Agreement.

Until the Termination Date (as defined in the Cooperation Agreement), the Company and Investor also agreed to certain mutual non-disparagement provisions.

The Cooperation Agreement will terminate on the date that is the earlier of (i) 30 days prior to the opening of the window for the submission of stockholder director nominations for the Company ’ s 2025 annual meeting of stockholders and (ii) 150 days prior to the one-year anniversary of the 2024 Annual Meeting (the earlier of (i) and (ii), the Termination Date).

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data